Introduction To Swing Trading

[Leth]

Introduction To Types Of Trading: Swing Traders
by Jason Van Bergen - Investopedia

Swing trading has been described as a kind of fundamental trading (see Introduction to Types of Trading: Fundamental Traders) in which positions are held for longer than a single day. This is because most fundamentalists are actually swing traders since changes in corporate fundamentals generally require several days or even a week to cause sufficient price movement that renders a reasonable profit.


But this description of swing trading is a simplification. In reality, swing trading sits in the middle of the continuum between day trading to trend trading. A day trader will hold a stock anywhere from a few seconds to a few hours but never more than a day; a trend trader examines the long-term fundamental trends of a stock or index and may hold the stock for a few weeks or months. Swing traders hold a particular stock for a period of time, generally a few days or two or three weeks, which is between those extremes, and they will trade the stock on the basis of its intra-week or intra-month oscillations between optimism and pessimism.

The Right Stock

The first key to successful swing trading is picking the right stocks. The best candidates are large-cap stocks that are among the most actively traded stocks on the major exchanges: Intel, Microsoft and Cisco, for example. In an active market, these stocks will swing between broadly defined high and low extremes, and the swing trader will ride the wave in one direction for a couple of days or weeks only to switch to the opposite side of the trade when the stock reverses direction.

The Right Market

It should be noted that in either of the two market extremes, the bear-market environment or raging bull market, swing trading proves to be a rather different challenge than in a market that is between these two extremes. In these extremes, even the most active stocks will not exhibit the same up-and-down oscillations that they would when indexes are relatively stable for a few weeks or months. In a bear market or a raging bull market, momentum will generally carry stocks for a long period of time in one direction only, thereby confirming that the best strategy is to trade on the basis of the longer-term directional trend.

The swing trader, therefore, is best positioned when markets are going nowhere - when indexes rise for a couple of days and then decline for the next few days only to repeat the same general pattern again and again. A couple of months might pass with major stocks and indexes roughly the same as their original levels, but the swing trader has had many opportunities to catch the short-term movements up and down (sometimes within a channel).

Of course, the problem with both swing trading and long-term trend trading is that success is based on correctly identifying what type of market is currently being experienced. Trend trading would have been the ideal strategy for the raging bull market of the last half of the 1990s, while swing trading probably would have been best for 2000 and 2001. With the 2002 bear market, the best strategy would have been to follow the trend and short everything in sight. As economists and traders would agree, the most accurate insight into trends is viewed in retrospect.

The Baseline

Much research on historical data has proven that in a market conducive to swing trading liquid stocks tend to trade above and below a baseline value, which is portrayed on a chart with an exponential moving average (EMA). In his book "Come Into My Trading Room: A Complete Guide To Trading" (2002), Dr. Alexander Elder uses his understanding of a stock's behavior above and below the baseline to describe the swing trader's strategy of 'buying normalcy and selling mania' or 'shorting normalcy and covering depression'. Once the swing trader has used the EMA to identify the typical baseline on the stock chart, he or she goes long at the baseline when the stock is heading up and short at the baseline when the stock is on its way down.

So swing traders are not looking to hit the home run with a single trade - they are not concerned about perfect timing to buy a stock exactly at its bottom and sell exactly at its top (or vice versa). In a perfect trading environment, they wait for the stock to hit its baseline and confirm its direction before they make their moves. The story gets more complicated when a stronger uptrend or downtrend is at play: the trader may paradoxically go long when the stock jumps below its EMA and wait for the stock to go back up in an uptrend, or he or she may short a stock that has stabbed above the EMA and wait for it to drop if the longer trend is down.

Taking Profits

When it comes time to take profits, the swing trader will want to exit the trade as close as possible to the upper or lower channel line without being overly precise, which may cause the risk of missing the best opportunity. In a strong market when a stock is exhibiting a strong directional trend, traders can wait for the channel line to be reached before taking their profit, but in a weaker market they may take their profits before the line is hit (in the event that the direction changes and the line does not get hit on that particular swing).

Conclusion

Swing trading is actually one of the best trading styles for the beginning trader to get his or her feet wet, but it still offers significant profit potential for intermediate and advanced traders. Swing traders receive sufficient feedback on their trades after a couple of days to keep them motivated, but their long and short positions of several days are of the duration that does not lead to distraction. By contrast, trend trading offers greater profit potential if a trader is able to catch a major market trend of weeks or months, but few are the traders with sufficient discipline to hold a position for that period of time without getting distracted. On the other hand, trading dozens of stocks per day (day trading) may just prove too great a white-knuckle ride for some, making swing trading the perfect medium between the extremes.

[TheBirdLives]

Originally Posted by Leth

Much research on historical data has proven that in a market conducive to swing trading liquid stocks tend to trade above and below a baseline value, which is portrayed on a chart with an exponential moving average (EMA).

The first question that came to mind was, "How many periods are in that EMA?"

Then I thought, "Well, that would depend on the stock, wouldn't it?"

So let me rephrase.

"What might I look at to get a feel for the periodicity of a stock?"

Seems like I could play with EMA(50 or 200) / SMA(5 or 15) crosses.
Don't know why I want to mix a short-term SMA with the longer term EMA.
That's just a gut feel and could be completely wrong, or at least baseless.

Any thoughts on this...other ideas?
BTW: RTFB is an acceptable answer.

I'm a fundy investor learning more about TA. I might swing-trade with stocks or with options, depending on the stock.

TIA

[BoneFishGA]

Originally Posted by TheBirdLives

The first question that came to mind was, "How many periods are in that EMA?"

Then I thought, "Well, that would depend on the stock, wouldn't it?"

So let me rephrase.

"What might I look at to get a feel for the periodicity of a stock?"

Seems like I could play with EMA(50 or 200) / SMA(5 or 15) crosses.
Don't know why I want to mix a short-term SMA with the longer term EMA.
That's just a gut feel and could be completely wrong, or at least baseless.

Any thoughts on this...other ideas?
BTW: RTFB is an acceptable answer.

I'm a fundy investor learning more about TA. I might swing-trade with stocks or with options, depending on the stock.

TIA

Don't know why no one took a shot at this one and I haven't seen Bird for a while now but anyway.
100 or 200 ma's seem to be a little long for trying to pick a swing trade to me. Something like 50 would maybe be better. Just an uneducated opinion though.
And where has Bird gone?

[Leth]

he may have flown the coop

[TheBirdLives]

Originally Posted by BoneFishGA

Don't know why no one took a shot at this one and I haven't seen Bird for a while now but anyway.
100 or 200 ma's seem to be a little long for trying to pick a swing trade to me. Something like 50 would maybe be better. Just an uneducated opinion though.
And where has Bird gone?

Originally Posted by Leth

he may have flown the coop

I just returned to San Juan Capistrano [to get my bass fixed].
I think that triggered a 'return' in general.

Reminds me of one of my favorite Artie Shaw tunes:
"When the Quail Return to San Quentin"
But that was a long time ago....

[BoneFishGA]

Glad your back Bird.
A bass fisherman too huh, my other hobby, that I'm not great at but I enjoy.

[TheBirdLives]

Originally Posted by BoneFishGA

Glad your back Bird.
A bass fisherman too huh, my other hobby, that I'm not great at but I enjoy.

Actually, a bass player — stand-up acoustic variety.

[aiki14]

reverse highjacking the thread back to topic (sorry fella's)
I chart several moving averages, the 20 simple inside of 2 standard deviation Bollinger bands, the 50 ema, the 89 ema (fibonaci), and the 200 ema. I think you want to choose the ones you like and then adjust the period to your taste (1min, 1 day, 1 wk etc) then look at the different timeframes and see if they reinforce one another and your thesis on the position.

[TheBirdLives]

Originally Posted by aiki14

reverse highjacking the thread back to topic (sorry fella's)
I chart several moving averages, the 20 simple inside of 2 standard deviation Bollinger bands, the 50 ema, the 89 ema (fibonaci), and the 200 ema. I think you want to choose the ones you like and then adjust the period to your taste (1min, 1 day, 1 wk etc) then look at the different timeframes and see if they reinforce one another and your thesis on the position.

Thanks for re-hijacking...and sorry for wondering off-topic.

Could you expand on "the 89 ema (fibonaci)" relationship? I thought the fibonaci lines were more than just an ema...I mean more than one line, anyway. This subject is clearly opaque to me.

A reference would be fine. I'm willing to do the reading.